Alex Gerko, the billionaire behind high-frequency trading giant XTX Markets, is fighting a £22.5 million tax bill at the UK's Supreme Court this week, challenging how British authorities tax complex profit-sharing arrangements in the financial sector.

XTX Founder Takes £22.5M Tax Fight to UK's Highest Court

The two-day hearing involves Gerko and 12 other former employees of hedge fund GSA Capital who are disputing how their deferred compensation should be taxed. The case centers on a profit-sharing scheme that allowed traders to receive up to 50% of their trading profits, spread over three years, while they worked in GSA's high-frequency foreign exchange unit between 2010 and 2015.

The dispute boils down to whether these payments should face individual income tax rates or the lower corporation tax rates that were initially applied. Tax authorities successfully argued at lower courts that the traders should pay the higher individual rates, creating the multimillion-pound bill now under appeal.

“The judgment results in massive double taxation and has wider implications for the financial industry,” Gerko said after losing his Court of Appeal challenge last year. He claimed the effective tax rate reached around 70%.

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Complex Partnership Structure at Heart of Dispute

The legal battle stems from an intricate compensation arrangement at GSA Capital involving a limited liability partnership called HFFX LLP. This partnership included both individual traders who developed automated trading software and corporate members, including one called GSA Member Limited.

Under the deferred payment plan, a portion of traders' compensation was retained by the corporate entity and invested in GSA's own funds. Over three years, this entity gradually sold the investments and redistributed the proceeds to individual traders as “Special Capital.”

The tax strategy aimed to have the corporate entity pay corporation tax on the retained profits, with individual traders avoiding additional income tax when they eventually received their deferred compensation. However, HM Revenue and Customs challenged this approach, arguing the payments should be taxed as individual income from the start.

Five Supreme Court justices are hearing the case, which could set important precedents for how the UK taxes deferred compensation arrangements across the financial industry. The legal questions involve complex issues about partnership taxation and whether profits retained by corporate partners should be treated as individual income when later distributed to employees.

High-Stakes Financial Impact

The case involves substantial sums for one of Britain's most successful entrepreneurs. Gerko, who has a net worth of £14.9 billion according to Bloomberg, has been named the UK's biggest taxpayer in recent years, with estimated annual tax bills of £664 million in 2023 and £487 million in 2022.

“The amounts involved are small compared to the billions of pounds in tax I have paid, and been happy to pay, over the years,” Gerko said following the Court of Appeal ruling in 2024.

After leaving GSA Capital in 2015, Gerko founded XTX Markets, which has grown into one of the world's largest trading firms. The company handles daily transactions worth $250 billion across equities , bonds, currencies, and commodity markets, competing with giants like Citadel Securities.

XTX's earnings surged 53% to a record £1.3 billion last year, cementing its position as one of the UK's most profitable private companies. The firm uses machine learning technology instead of human traders to execute deals across 35 countries.

Part of Broader Industry Pattern

The ruling against Gerko follows a series of similar defeats for high-profile trading firms in tax disputes with British authorities. In December, partners at BlueCrest Capital were found liable for income tax on a 2008 compensation plan after the investment firm lost its legal battle.

These cases highlight ongoing tensions between financial firms and tax authorities over complex compensation structures designed to retain talent and defer payments. The deferred payment plans often include provisions to claw back funds if regulatory fines are imposed, with one case involving a $100,000 fine that was returned from a trader's bonus.